Corona virus hits upstream investment

• DOI: http://doi.org/10.1111/oet.12769
• Published date: 01 April 2020
• Date: 01 April 2020

LOOKING AHEAD

Corona virus hits upstream investment

Efforts to tackle the corona virus are both delaying pro-

jects due to movement restrictions, and leading to sharp

reductions in capex budgets for this year, which will see

many other projects delayed or even cancelled. Compa-

nies most affected are upstream independents in the US

onshore and international offshore sectors, but the slow-

down is also apparent among majors and some national

oil companies (NOCs).

The sharp fall in oil prices and huge hit to demand

from the corona virus is leading oil and gas companies

around the world to prioritise short-term cashflow and

cut costs and investment. By mid-March, the upstream

sector had already announced capex cuts of more than

$25 bn for 2020, and this could rise further over coming

weeks. Cuts are also being made downstream, including

over $2 bn in the North American midstream sector

alone.

Across the industry, consultant Wood Mackenzie

already estimates that overall spending cuts (including

dividends) of 40% on average may be needed to balance

company books at $35/bbl oil. Cuts to discretionary

investment will be “immediate and deep”, it said, with

levels falling by well over 25% year-on-year in 2020 (over

$100 bn in total). If prices stay below $30/bbl, the cuts

could be even more severe.

Several companies have already made announce-

ments. For example, US major Chevron said in late

March that it would cut “organic capital and exploratory

spending”in 2020 to $16 bn, a 20% reduction from its ini-

tial guidance of $20 bn, which is fairly typical for larger

integrated companies in the industry. Half the reduction,

or $2 bn, will occur in Chevron's upstream unconven-

tional operations, primarily in the US Permian basin.

Shell, BP and others have announced similar cuts.

1|US SHALE IN THE

FIRING LINE

The US onshore could be hardest hit, as its short invest-

ment cycle means investors are not committed to long

term projects. Goldman Sachs said it believed US capex

could fall on average for 2020 “by about 30% before ser-

vices cost deflation with potential for an additional 5%-

10% from lower services costs,”which will lead to more

cutbacks in an already weakened US oil services and

equipment sector—hitting companies like Haliburton.

By mid-March, most US shale-focused independents

had made initial announcements, with capex cuts rang-

ing up to 70%; and US onshore rig numbers are now fall-

ing quickly. For example, Continental Resources said

that it would slash its capital budget 55%, while reducing

2020 production guidance nearly 10%. ConocoPhillips is

cutting $400 mn (out of $700 mn for North America as a

whole) from its continental US operations, much of it

from shale developments in the Eagle Ford basin. Some

companies with higher debt, lower hedging or less pro-

ductive assets are expected to seek buyers or go under.

In Canada, spending plans have already been cut by

more than $4.5 bn. Local integrated producer, Suncor,

said at the end of March that it would cut $1 bn from its

2020 capital expenditures budget, bringing it to about

$3 bn. In eastern Canada, Suncor, along with partner,

Husky, have suspend the West White Rose crude project

off Newfoundland, which had been due to come online

in late 2022 with output of up to 75 000 bpd. Earlier this

month, Husky announced cuts of more than $27% for

2020, down from nearly $2.4 to $1.7 bn. Further west in

Canada, some relatively high cost tar sands projects in

Alberta have been cancelled and others are being shut

down as prices sink to non-commercial levels.

Across the Atlantic in the UK North Sea, industry

body Oil and Gas UK said in late March that companies

would rein in drilling and slash capital spending by 20%

to 30% to around $4.7 to $5.3 bn, leading to job losses and

damage to the supply chain. Travel restrictions and quar-

antines have also restricted development and mainte-

nance work in the UK and Norwegian North Sea sectors.

2|ASIA-PACIFIC AFFECTED BY

DELAYS AND LOW PRICES

In Asia-Pacific, Wood Mac estimates that projects with a

combined peak capacity of 1.5 mn bpd of oil and almost

4 bn ft/day of gas are at risk of delay due to virus travel

restrictions. And looking ahead, close to $35 bn of spend

is at risk in 2020 to 2022 due to the low prices—only

around 16% of prospects in the region breakeven below

$35/bbl, and most of those are smaller fields near existing

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